8-4 EXPECTED AND REQUIRED RATES OF RETURN Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the required return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?

12.2%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is presented below:

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

where,

The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.      

= 5% + 1.2 × 6%

= 5% + 7.2%

= 12.2%

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